Moody’s downgrades Ukraine to ‘default imminent’

Moody's Investors Service has downgraded Ukraine's government bond rating one notch from Caa2 to Caa3, citing the current political crisis and deepening economic instability as reasons for its negative outlook.

The Caa rating is a credit risk grading pertaining to investments
that are both very poor quality and entail a high credit risk.
The current downgrade drops Ukraine from Moody's "extremely
speculative" rating to "default imminent with little prospect
for recovery."

Moody’s said the downgrade was driven by three factors, which
“exacerbate Ukraine's more longstanding economic and fiscal
fragility.”

The first factor is Ukraine’s political crisis, citing the recent
regime change in Kiev and subsequent events in Crimea. The agency
went on to cite Ukraine’s stressed external liquidity position,
which faces continued decline in foreign currency reserves, the
withdrawal of Russian financial support and a spike in gas import
prices. Moody’s further noted that this assessment accounts for
the near-term liquidity relief recently hammered out with the
IMF. Finally, due to a “sizable fiscal deficit,” the
agency expects a significant contraction of GDP and a sharp
currency depreciation as the debt to GDP (Gross Domestic Product)
ratio hits between 55-60 percent by year’s end.

On Thursday, Gazprom CEO Aleksey Miller announced Ukraine would
begin paying $485 per thousand cubic meters of natural gas
starting from April. The price rise followed a cancelation of the
Black Sea hosting deal. On Wednesday President Vladimir Putin
signed a federal law ending Russia’s commitment to the Kharkov
Agreement, as the Black Sea port of Sevastopol is now under
jurisdiction of the Russian Federation. This follows another
steep hike on April 1, when the price Ukraine paid for gas went
up 44 percent to $385, after Kiev failed to meet its debt
repayments.

Last December, Russia offered Ukraine’s Yanukovich-led government
a $15 billion loan and a 33 percent discount on natural gas: a
lifeline to help its faltering economy. Moscow went through with
the purchase of a $3 billion Eurobond from Kiev, though Russia
later froze both the gas deal and the credit- line, due to events
on the ground.

On Friday, Ukraine said it had started emergency talks with
European Union neighbors on the possibility of importing natural
gas from the West.

Based on these factors, Moody's said the country was unlikely to
see Ukraine’s sovereign debt rating improve in the near future,
stating its outlook for the country was negative. Any improvement
would only come if long-term political and economic improvements
were forthcoming. In January, Ukraine also saw its sovereign
rating fall by one notch.

After Ukraine reached a preliminary deal with international
lenders to unlock $27 billion in assistance late last month, the
International Monetary Fund (IMF) announced last week a $14-18
billion standby credit for the country.

However, in order to secure the IMF credit, the country of 46
million was forced to cancel fuel subsidies to private citizens
and businesses, sparking a 50 percent hike in oil and natural gas
bills.

Ukraine has also promised the IMF it will cut its budget deficit
to 2.5 percent of GDP by 2016.

“The country is on the edge of economic and financial
bankruptcy,” Prime Minister Arseniy Yatsenyuk said in Kiev
last week. “This package of laws is very unpopular, very
difficult, very tough. Reforms that should have been done in the
past 20 years.”

Yatsenyuk warned GDP could shrink by 3 percent in 2014, while
inflation could hit up to 14 percent.